Financial Statements Allied for Accounting & Auditing Public Accountants & Consultants BDO Khaled & Co Public Accountants & Advisers
Index Page Limited review report Statement of Financial position Statement of Income Statement of change in equity Statement of cash flow Accounting policies and notes to financial statements 2 3 4 5 6 7-43
Suez Canal Bank (Egyptian Joint Stock Company) Statement of income Three months For the Three months For the ended period ended ended period ended Note 9/30/2018 9/30/2018 9/30/2017 9/30/2017 No. Interest income from loans and similar income (6) 1 082 802 3 146 659 935 524 2 366 800 Cost of deposits and similar charges (6) ( 831 890) (2 480 153) ( 670 462) (1 575 295) Net interest income 250 912 666 506 265 062 791 505 Fees and commissions income (7) 45 490 156 466 37 041 110 330 Net fees and commissions income 45 490 156 466 37 041 110 330 Dividends income (8) 44 35 445 996 11 987 Net trading income (9) 8 201 51 977 42 924 77 901 ( Loses) Gains on financial investments (20) ( 12 132) ( 9 275) 223 767 undistributed profits from Investments in associates (21) 1 567 2 590 1 690 2 426 Impairment losses of customer's loans (13) - ( 18 866) ( 45 990) ( 97 615) Administrative expenses (10) ( 187 072) ( 530 460) ( 152 396) ( 409 931) Other operating revenues (expenses) (11) 82 068 175 192 8 822 527 Net profit before income tax 189 078 529 575 158 372 487 897 Income tax expenses (12) ( 68 408) ( 198 851) ( 63 813) ( 186 541) Net profit for the period 120 670 330 724 94 559 301 356 Earnings per share (LE/share)- Basic (14) 0.60 1.65 0.47 1.51 The attached notes from Page (7) to Page (45) form part of these financial statements and are to be read therewith. -4-
Suez Canal Bank (Egyptian Joint Stock Company) Statement of change in equity Legal General Private Capital Fair value reserve General Other IFRS 9 Retained Total Note.No Capital Reserve Reserve Reserve Reserve available for sale investments banking reserve Reserves reserve earnings 30 September 2017 LE.000 LE.000 LE.000 LE.000 LE.000 LE.000 LE.000 LE.000 LE.000 LE.000 LE.000 Balance at the beginning of the year 2 000 000-24 117 45 158 ( 59 827) 854 - - 1 311 2 011 613 Net (loss) change in fair value of the financial instruments available -for- sale - - - - 39 401 - - - - 39 401 Net profit for the period - - - - - 301 356 301 356 Balance at 30 September 2017 2 000 000-24 117 45 158 - ( 20 426) 854 - - 302 667 2 352 370 30 September 2018 Balance at the beginning of the year 2 000 000-24 117 45 158 ( 776) 854 ( 109) 152 028 205 060 2 426 332 Net (loss) change in fair value of the financial instruments available -for- sale (31-c-3) - - - 40 309 - - - 40 309 Transfer to reserves -According to general assembly approval in 4 April 2018 16 337 29 034 16 077 - ( 61 448) - Transfer from banking reserve to retained earnings ( 991) 991 - Net change in other reserves 109 109 Net profit for the period 330 724 330 724 Balance at 30 September 2018 2 000 000 16 337 24 117 45 158 29 034 39 533 15 940-152 028 475 327 2 797 474 The attached notes from Page (7) to Page (45) form part of these financial statements and are to be read therewith. -5-
Suez Canal Bank (Egyptian Joint Stock Company) Statement of cash flow For the For the Note.No period ended period ended 9/30/2018 9/30/2017 LE.000 LE.000 Cash flows from operating activities Net profit before income tax 529 575 487 897 Adjustments to reconcile net profit to cash flow from operating activities Depreciation and amortization (22,24) 29 698 22 058 Impairment of credit losses ( 19) 18 866 97 615 Provisions used (other than loan provisions) ( 29) - ( 7 695) Revaluation differences of financial assets held -for- trading ( 9) ( 11 078) ( 2 375) profits from Investments in associates ( 21) ( 2 590) ( 2 424) other provisions ( 29) - 40 712 profit from sale of fixed assets ( 11) ( 10 089) ( 29 034) Interest income from non performing loans ( 17 832) - Profit from sale of assets reverted to bank ( 86 832) - profits from sale of financial investments (other than financial assets held -for- trading) ( 20) ( 2 857) ( 1) Foreign currencies revaluation differences of other provision ( 29) 203 ( 672) Revaluation differences of assets reverted to the bank ( 19) Revaluation differences of financial investments (other than financial assets held -for- trading) ( 20) ( 2 075) 5 111 Dividends income ( 8) ( 35 445) ( 11 987) Amortization of preimum&discount of financial investments(other than financial assets held -for- trading) ( 20) 1 502 1 868 losses of financial investments(other than financial assets held -for- trading) ( 20) 12 132 ( 768) Operating profit before changes in assets & liabilities provided from operating activities 423 178 600 305 Net (increase) decrease in assets and increase (decrease) in liabilities Due from Central Bank of Egypt within mandatary reserve percentage ( 15) ( 400 748) (1 529 315) Due from banks ( 16) 2 344 649 ( 780 041) Treasury bills and other governmental notes ( 17) 2 267 776 2 005 508 Financial assets held -for- trading ( 18) ( 312) 8 455 The attached notes from Page (7) to Page (48) form part of these financial statements and are to be read therew ( 19) (2 175 055) ( 320 230) Other assets ( 23) ( 317 231) ( 337 352) Due to banks ( 25) 443 401 ( 76 003) Customers' deposits ( 26) 4 339 754 5 604 756 Other liabilities ( 28) 97 042 63 159 Income Taxes paid ( 12) ( 199 314) ( 185 330) Provision used (other than loans provision) ( 29) ( 32 028) - Net cash flow (used in) provided by operating activities 6 791 112 5 053 912 Cash flows from investing activities Payments to purchase fixed assets & fixtures branches ( 24) ( 59 850) ( 35 947) proceeds from sale of fixed assets ( 24) 12 715 40 040 proceeds from sale of Financial investments other than financial assets held-for-trading ( 9) 230 - Proceeds from financial investments other than financial assets held -for- trading ( 20) 2 878 642 1 164 656 Payment to purchase financial investments other than financial assets held -for- trading ( 20) (1 831 268) ( 290 337) Dividends proceeds ( 8) 35 445 11 987 Payment to purchase Investments in associates ( 12) ( 2 999) 736 proceeds from Investments in associates ( 21) 5 407 - Net cash flow provided by investing activities 1 038 323 891 135 Cash flows from financing activities other loans ( 27) 9 000 ( 18 000) cash flow provided by(used in) financing activities 9 000 ( 18 000) Net changes in cash and cash equivalent during the period 7 838 434 5 927 045 Cash & cash equivalent at the beginning of the period 6 582 323 3 806 135 Cash & cash equivalent at the end of the period ( 32) 14 420 757 9 733 180 Cash and cash equivalent are represented in( Note no.32): Cash and due from Central Bank of Egypt 3 984 902 3 311 833 Due from banks 16 064 098 13 024 177 Treasury bills and other governmental notes 6 341 957 6 645 263 Due from Central Bank within reserve percentage (3 719 835) (2 908 724) Deposits with banks with maturity more than three months* (2 113 301) (3 694 131) Treasury bills and other governmental notes (with maturity more than three months) (6 137 064) (6 645 238) Cash & cash equivalents 14 420 757 9 733 180 Non- cash transactions are represented in: - An amount of LE 34 658 Thousands represents additions of fixed assets have been transferred from debit balances to fixed assets during the period, this amount was excluded from both debit balances and fixed assets. - An amount of LE 40 310 Thousands represents the valuation differences of available for sale investments, this amount was excluded from both fair value reserve and available for sale investments,investments held to maturity. - An amount of L.E 93 076 Thousands represents Assets reverted to the Bank debitors, this amount was excluded from both Loans and facilities to customers and other assets and Settlement interest - An amount of L.E 182 039 Thousands represents Assets reverted to the Bank, this amount was excluded from both Loans and facilities to customers and other assets. *From acquisition date. The attached notes from Page (7) to Page (45) form part of these financial statements and are to be read therewith. -6-
1- Background provides retail, corporate and investment banking services in Arab Republic of Egypt through 41 branches and employees 1 253 staff member at financial statements. Suez Canal Bank (an Egyptian Joint stock company) established as a Commercial Bank in pursuance of the Ministerial Decree no. 55 of 1978, issued in the official Gazette on 4 March 1978 and in accordance with provisions of investment law no. 43 of 1974 and its amendments, which was superseded by law No. (8) Of investment guarantees and incentives. The head office is on 7 & 9 Abd El Kader Hamza St., Garden city, Cairo and the bank is listed in the Egyptian stock exchanges. 2- Summary of accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been applied for all presented year unless otherwise will be stated A- Basis of preparation of financial statements The financial statements are prepared in accordance with Egyptian Accounting Standards issued during 2006 and its amendments and in accordance with Central Bank of Egypt instructions approved by its Board of Directors on 16 December 2008 in addition to the historical cost convention basis, modified by the revaluation of the trading financial assets and liabilities, the financial assets and liabilities at fair value through profit or loss and the available for sale financial investments and all financial derivatives contracts. These financial statements have been prepared according to the Egyptian laws and regulations. B- Subsidiaries and Associates B-1 Subsidiary firms Subsidiaries are all companies (including special purpose entities) over which the bank has owned directly or indirectly the power to govern the financial and operating policies, generally the bank owns more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the bank has the ability to control the entity. B-2 Associate firms Associates are all companies over which the bank has owned directly or indirectly a major influence, but it doesn t control them, generally the bank owns between 20% and 50% of the potential voting rights. The purchase method is used to account for the acquisition of subsidiaries by the bank. The cost of an acquisition is measured as the fair value of the assets, or/and asset given or/and equity instruments issued and loans assumed at the date of exchange, plus costs directly attributable to the acquisition. Net assets including contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the minority interest. The excess of acquisition cost over the bank s share fair value in the net assets acquired is recorded as goodwill. If the acquisition cost is less than the fair value of the net assets, the difference is recognized directly in the income statement under the item "Other operating income/ (expenses). Accounting for subsidiaries and subsidiaries in the financial statements is recorded by using cost method. According to this method, investments recorded at cost of acquisition including goodwill if any and deducting impairment losses. Dividends are recorded in the income statement when adoption of the distribution has been occurred and affirming the bank s right in collecting them has been recognized. C -Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is a segment by which, provide products or services within a particular economic environment that are subject to risks and returns different from those of segments operating in other economic environments. 7
D - Foreign currency translation D-1 Functional and presentation currency The financial statements are presented in Egyptian pound, which is the bank s functional and presentation currency. D-2 Transactions and balances in foreign currencies The bank maintains its accounting records in Egyptian pound. Foreign currency transactions are translated into Egyptian pound using the exchange rates prevailing at the date of the transaction. Monetary assets and liabilities in foreign currencies are retranslated at the end of each year at the exchange rates then prevailing. Foreign exchange gains and losses resulting from settlement of such transactions and valuation differences are recognized in the income statement under the following items: Net trading income or net income, if resulting from financial instruments designated as at fair value through profit or loss at initial recognition, for financial assets/liabilities held for trading or designated as at fair value through profit or loss at initial recognition. Other operating income (expenses) for the other items. Changes in the fair value of monetary financial instruments in foreign currencies classified as investments available for sale (debt instruments) are classified as valuation differences resulting from changes in amortized cost of the instrument and differences resulted from changes in applicable exchange rates and differences resulted from changes in the instrument fair value. Valuation differences relating to changes in amortized cost are recognized in income statement under ''Interest and similar income'' while differences relating to changes in exchange rates are recognized under item "other operating income (expenses). Differences resulting from changes in fair value are recognized under "fair value reserve available for sale investments" in the equity caption. Valuation differences resulting from non-monetary items include profits and losses resulting from changes in fair value such as equity instruments held at fair value through profits and losses, while valuation differences resulting from equity instruments classified as financial investments available for sale are recognized as "fair value reserve- available for sale investments" under the equity caption. E - Financial assets The bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity financial investments; and available-for-sale financial investments. Management determines the classification of its investments at initial recognition. E-1 Financial assets at fair value through profit or loss This category consists of financial assets held for trading and financial assets designated at fair value through profit or loss at inception. Financial assets are classified as held for trading if they are acquired or incurred principally for the purpose of selling in the near term or if is part financial instruments portfolio that are managed together and there is evidence resulted from recent actual transaction that profit can be recognized. E-2 Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: - Those that the bank intends to sell immediately or in the short term, which are classified as held for trading, or those that the bank upon initial recognition recorded as at fair value through profit or loss. - Those that the bank upon initial recognition designates as available for sale. - Those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. E-3 Financial investments held to maturity Held to maturity financial investments are non-derivative assets which carry fixed or determinable payments and where the bank has the intention and the ability to hold to maturity. Any sale of a significant amount, not close to the date of its maturity, would result in the reclassification of all held to maturity investments as available for sale except in the emergency cases. 8
E-4 Financial investments available for sale Available for sale financial investments are non-derivatives financial assets that are intended to be held for unspecified period and may be sold to provide liquidity or due to changes in shares prices, foreign exchange currencies, or interest rate. The following applies to financial assets: -Purchases or sales of financial assets at fair value through profit and loss, held to maturity financial investments, and available for sale financial investments are recognized at the trade date which is the date the bank is committed to purchase or sell the financial asset. -Financial assets that are not classified at fair value through profit and loss at initial recognition are recognized at fair value plus transaction cost, while the financial assets classified as at fair value through profit and loss are initially recognized at fair value only and the transaction cost is recognized in the profit and loss under "net trading income" -Financial assets are derecognized when the rights to receive cash flows have expired or when the bank transfer all asset risks and rewards to another party, while a financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. -Available for sale financial investments and financial assets designated at fair value through profit and loss are subsequently measured at fair value. While loans and facilities and held to maturity investments are measured subsequently at amortized cost. -Gains and losses arising from changes in fair value of financial assets designated at fair value through profit and loss are recorded in income statement during the period it occurred. Gains and losses arising from changes in fair value of available for sale financial investments are recognized in "fair value reserve for available for sale investments" in equity until the financial asset is sold, or impaired at which time, the cumulative gain or loss previously recognized in equity should be recognized in profit or loss. -Interest income related to monetary assets classified as available for sale is recognized based on the amortized cost method in profit and loss. The foreign currency revaluation differences related to available for sale investments are recognized in the profit and loss. Dividends related to available for sale equity instruments are recognized in the profit and loss when they are declared. -The fair values of quoted investments in active markets are based on current bid prices. If there is no active market for a financial asset, the bank establishes fair value using valuation techniques. These include the use of recent arm s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants, if the bank could not assess the value of the equity classified as available for sale, these instruments should be valued at cost and will be subject to impairment test. -Debt instruments can be reclassified from the available for sale investments to "loans and receivables" or" financial assets held to maturity" using fair value in certain circumstances - when the bank has the intention and ability to hold the instrument on the future or till maturity. Reclassifications are recorded at fair value at the date of reclassification. Any related profits or losses that have been previously recognized in equity are treated as follows: 1.Financial assets with fixed or determinable payments and fixed maturity valued at amortized cost, using the effective interest method. The difference between the amortized cost using the effective interest method and the repayment value is amortized using the effective interest rate method. In case of financial asset s impairment any profits or losses previously recognized in equity is recognized in profit and loss. 2.Profits and losses related to the financial assets without fixed or determinable maturity are recorded in equity till selling or disposing it. In case of impairment, profit and losses that have been previously recognized directly in equity is recognized in the profit and loss. If the bank changes its estimates regarding payments or proceeds, the book value of a financial asset (or group of financial assets) has to be adjusted to reflect the actual cash inflows and the change in this estimate through calculating the present value of estimated future cash flows using the effective interest rate for the financial instrument. This adjustment is recognized as either income or expense in the profit and loss. 9
In all cases, if the bank re-classified financial asset in accordance with what is referred to above and the bank subsequently increase its future cash proceeds estimates resulted from an increase in the recoverable amount from its cash receipts, this increase is recognized as an adjustment to the effective interest rate not as an adjustment in the book value of the asset at the date of change in estimate. F - Netting between financial instruments Financial assets and liabilities are offset when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. Treasury bills, Repos and reverse Repos agreements are netted on the balance sheet and disclosed under treasury bills and other governmental notes. G - Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognized within interest income and interest expense in the income statement using the effective interest rate method. The effective interest rate method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. When loans or debts are classified as non-performing or impaired, related interest income are not recognized but rather, are carried off balance sheet in statistical records and are recognized under revenues according to cash basis as per the following: - When collected and after recovery of all arrears for retail loans, personal loans, small and medium business loans., real estate loans for personal housing and small loans for businesses. - For loans granted to corporate, interest income is recognized on cash basis after the bank collects 25 % of the scheduling installments and after the installments continued to be regular for at least one year. In case the client is continuing in performing the payment, the calculated interest is added to the loan s balance without the marginal interest not included in the income until after paying the loan s balance in the balance sheet before the reschedule. H - Fees and commission income Fees and commissions related to loan and facilities are recognized as income when the service is rendered. Fees and commission income related to non-performing or impaired loans or debts are suspended and are carried off balance sheet and are recognized under income according to the cash basis when interest income is recognized in accordance with note (2 I) above. Fees and commissions which represent part of the financial asset effective rate is recognized as adjustment to the effective interest rate. Commitment fees are recognized as revenue when there is probability that this loan will be used by the customer, as commitment fees represent compensation for the continuing interference to own the financial asset. Subsequently its recognized as adjustments to the effective interest rate of the loan. If the commitment period passed without issuing the loan, commitment fees is recognized as income at the end of the commitment period. Fees and commission related to equity debts measured by fair value is recognized as income at initial recognition. Fees and commission related to marketing of syndicated loans is recognized as income when the marketing is completed and the loan is fully used or the bank kept its share of the loan using the effective interest rate as used by the other participants. Fees and commission arising from negotiation, or participating in a negotiation to the favor of a third party as in share acquisition arrangements or purchase of securities or purchase or sale of businesses are recognized as income when the transaction is completed. Commission and fees related to management advisory and other services are recognized as income based on the contract terms, usually on a timeappropriation basis. Asset management fees are recognized over the period in which the service is provided. 10
I - Dividends income Dividends are recognized in the profit and loss when the bank s right to receive those dividends is established. J- Impairment of financial assets J-1 Financial assets at amortized cost At each financial statements date, the bank assesses whether there is objective evidence that any financial asset or group of financial assets has been impaired as a result of one or more events occurring since they were initially recognized (a loss event ) and whether that loss event has impacted the future cash flows of the financial asset or group of financial assets that can be reliably estimated. The bank considers the following indicators to determine the existence of substantive evidence for impairment losses: - Great financial troubles facing the borrower or debtor. - Breach of the loan agreement, e.g. default. - Expected bankruptcy of borrower or subject to liquidation lawsuit or re-structuring the finance granted to it. - Deterioration of competitive position of borrower. - Granting privileges or assignments by the bank to the borrower, due to economic or legal reasons, which are not granted by the bank in the normal course of business. - Impairment of guarantee. - Deterioration of creditworthiness. A substantive proof for impairment loss of the financial assets is the existence of clear information indicating a measurable decline in the expected future cash flows of such category since initial recognition though such decline is not identifiable for each individual asset, for example, the increase in failure payment cases for one of the bank products. The bank estimates the period between identifying the loss event and its occurrence ranges from three to twelve months. The bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant taking into consideration the following: -In case there is no objective evidence that an impairment loss has been incurred on a financial instrument considered individually, be it significant or not, the bank includes that financial asset in a group of financial assets having similar characteristics in terms of credit risk and tests the whole group for impairment. -A separate impairment test is made for a financial asset if there is objective evidence that this asset is impaired. If the impairment occurred then this asset will be separated from group of financial assets that are collectively evaluated for impairment. -If the result of the previously test did not recognized impairment loss, then this asset will be added to the group. Impairment loss is calculated by the difference between the carrying amount and the present value of estimated future recoverable cash flows, excluding future expected credit loss not charged yet, discounted at the financial assets original effective interest rate. This impairment is booked in the income statement as "impairment loss" and the book value of the financial asset is reduced by the impairment amount using "impairment loss provision". If there is evidence that loan or investment held to maturity carry variable rate, the discount rate will be the contract effective interest rate when there is objective evidence that an impairment loss has been incurred. For practical purposes, the bank may measure the impairment loss using the fair value of the instrument through its market rate for guaranteed financial assets present value for expected futures cash flow has to be considered in addition to the proceeds from sale of guarantee after deducting selling cost. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics according to the bank classification taking into consideration type of asset, industry, geographical location, collateral, past-dues and other relevant factors. Those characteristics are relevant to the estimation of future cash flows for those groups of assets as they are indicators of the debtors ability to pay all amounts due according to its contract terms for assets under study. 11
If historical impairment losses rates method is used for a group of financial assets that are collectively evaluated for impairment, future contractual cash flow will be used by the bank in future and the historical loss for a group of assets with similar credit risk characteristics are considered. Historical impairment loss rates are adjusted to reflect the effects of current circumstances that did not affect the period on which the historical impairment loss rates is based and to remove the effects of circumstances in the historical period that are not currently exist. The bank has to ensure that the estimates of changes in future cash flows for groups of assets are in consistence with changes in relative data from period to period, such as, changes in unemployment rates, real estate prices, settlement status, or other factors that may affect the probability and magnitude of losses. The bank reviews the basis and methods of estimation regularly. J-2 Available for sale financial investments At each financial statements date, the bank estimates if there is objective evidence that impairment loss for an asset or a group of assets classified as available-for-sale or held to maturity is occurred. For listed equity instruments classified as available for sale investments, impairment is recognized if it s significant and a prolonged decline its price below its acquisition cost is observed. The decline in value is considered significant for the equity instruments if it reaches 10% of the financial instrument s cost, and it is considered prolonged if it extends for a period of more than 9 months. When a decline in the fair value of an available for sale financial asset has been recognized directly in equity under fair value reserve and subsequent objective evidence of impairment emerges, the bank recognizes the total accumulated loss previously recognized equity will be recognized in profit and loss. Impairment losses recognized on equity instruments on income statement are not subsequently reversed. Impairment losses recognized through income statement on debt instruments classified as available for sale are reversed through income statement if the price subsequently increased and this increase can be objectively related to an event occurring after the recognition of impairment loss in income statement. K- Computer software Expenses related to development or maintenance of computer software are recognized as expenses on Income Statement at the time of incurring them. They are recognized as intangible assets in the expenses correlated directly to specific software that are under the control of the Bank from which the generation of economic benefits is expected whose cost exceeds more than one year. Direct expenses include the cost of employees on the software team in addition to appropriate share in related general expenses. It is recognized as development cost in expenses if it leads to increasing or expanding the performance of the computer software above its original specifications, and is added to cost of the original software. The cost of computer software recognized as assets is depreciated along the year from which it is expected to make use of in the manner not exceeding five years. L- Fixed assets They represent land and buildings related to head office, branches and offices, and all fixed assets are reported at historical cost minus depreciation and impairment losses. The historical cost includes the charges directly related to acquisition of fixed assets items. Subsequent costs are included in the asset s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the bank and the cost of the item can be measured reliably. Maintenance and repair expenses are charged to other operating expenses during the financial period in which they are incurred. Land is not depreciated, depreciation of other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings and constructions 50 years Computers / core banking system 5 years Means of transport 5 years Machines and equipment 8 years Fixtures and fittings 5 years Office furniture 10 years 12
The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset s fair value less costs to sell or value in use. Gains and losses on disposals are determined by comparing proceeds with asset carrying amount. These gains and (losses) are included in other operating income (expenses) in the income statement. M- Impairment of non-financial assets Assets having no fixed useful life except for goodwill shall not be amortized, and their impairment shall be tested at least annually. The impairment of amortized assets is studied to determine if there are events or changes in the circumstances indicating that the book value may not be recoverable. The impairment loss is recognized by the excess amount of book value over the realizable value. The recoverable value represents net realizable value of the asset or the usage amount whichever is higher. For the purpose of estimating the impairment, the asset is grouped with the smallest cash generating unit. At each balance sheet date, non-financial assets with impairment has to be reviewed to determine if there is impairment reversal made to the income statement. N -Leases The accounting treatment for the finance lease is in accordance with law 95 of year 1995, if the contract entitles the lessee to purchase the asset at a specified date and amount, and the contract term is more than 75% of the asset expected useful life, or the current value of the total lease payments represents at least 90% of the value of the asset then this lease is considered finance lease. Other than that the lease has to be considered operating lease. N-1 Leasing Finance lease contracts recognize rent as expense in the period it occurred in profit and loss, including maintenance cost related to the leased assets. If the bank decides to exercise the rights to purchase the leased assets, the cost of this right will be capitalized over the fixed asset and depreciated over the assets' expected remaining useful life in accordance with similar assets. O -Cash and cash equivalents For the purposes of the cash flows statement, cash and cash equivalents include balances due within three months from date of acquisition, cash and balances due from the Central Bank of Egypt other than the mandatory reserve, and current accounts at banks, treasury bills, and other governmental notes. P- Other provisions Provisions for restructuring costs and legal claims are recognized when the bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow is required to settle an obligation is determine taking into consideration the group of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any obligation in the group is minimal. The provision no longer required is recorded with other operating revenues (expenses) Q - Income tax The income taxes on the year's profits or losses include the tax of the current year and the deferred tax and they are recognized in the income statement with the exception of the income tax on the items of shareholder's equity which is directly recognized within equity. The income tax is recognized on the basis of the net profit subject to tax through the application of enacted tax rates at the date of preparing the balance sheet in addition to the tax adjustments related to previous years. Deferred taxes are recognized from temporary timing differences between the book value of assets and liabilities according to accounting bases and their values according to tax bases. Deferred tax assets and liabilities are measured at the tax rates that expected to apply in the period in which the ability is settled or the asset realized, based on tax rates that have been enacted or substantively enacted by the end of the reporting period. 13
The deferred tax assets are recognized when there is likelihood to achieve taxable profits in the future through which this asset can be utilized. The value of deferred tax assets is reduced by the portion which will not realize the expected taxable benefit in the coming years, in case of the increase in expected taxable benefits the deferred tax assets should be increased within the limit of previous reduction. R- Borrowing Loans obtained by the bank are recognized at inception at fair value less the cost of obtaining the loan. Subsequently the loans are measured by amortized cost. The difference between net proceeds and the amount to be paid over the borrowing period using the effective interest rate is to be recognized to the income statement. The fair value of the portion which represents a liability regarding, bonds convertible into shares is to be defined by applying the market equivalent rate of return of non- convertible bonds. This liability is recognized by the amortized cost method until conversion or maturity of bonds. The remaining proceeds are to be charged to the conversion option included within shareholders' equity in net value after deduction of the income tax effect. The preferred shares which either carry mandatory coupons, redeemed at a defined date or according to the shareholders' option are to be included within the financial liabilities and to be presented within the item of "Other loans". The dividends of these preferred shares are recognized in the income statement under Interest expense on deposits and similar charges item, using the amortized cost method and by using the effective rate of return. S- Capital S-1 Cost of capital Issuance cost directly related to issuing new shares or issuing shares related to acquisition or share options is charged to shareholders' equity of total proceeds net of tax. S-2 Dividends Dividends are charged when declared by the General Assembly of shareholders. Those dividends include employees share in the profits and the Board of Directors remuneration as prescribed by the articles of association and law. T - Comparative figures The comparative figures shall be re-classified, when necessary, to be in conformity with the changes to presentation used in the current year. 3- Financial Risk Management: The bank, as a result of the activities it exercises, is exposed to various financial risks. Since the basis of financial activity is to accept risks; some risks or group of risks are analyzed, evaluated and managed together. The bank intends to strike a balance between the risk and return and to reduce the probable adverse effects on the bank s financial performance. The most important types of risks are credit risk, market risk, liquidity risk and other operating risks. The market risk comprises foreign currency exchange rates, interest rate risk and other pricing risks. The risk management policies have been laid down to determine and analyze the risks, set limits to the risk and control them through reliable methods and updated systems. The bank regularly reviews the risk management policies and systems and amend them to they reflect the changes in market, products and services and the best updated applications. Those risks are managed by risk department in the light of policies approved by Board of Directors. The risk department determines, evaluates and covers the financial risks, in collaboration with the bank s various operating units, and the Board of Directors provides written policies for management of risks as a whole, in addition to written policies covering specific risk areas, like credit risk, foreign exchange rate risk, interest rate risk, and using the financial derivative and non derivative instruments. Moreover, the risk department is independently responsible for periodical review of risk management and control environment. 14
A- Credit risk The bank is exposed to the credit risk which is the risk resulting from failure of one party to meet its contractual obligations towards the bank. The credit risk is considered to be the most significant risks for the bank. The bank set specific procedures to manage that risk. The credit risk is in the lending and investments activities which are represented bank s assets contain debt instruments. The credit risk is also found in off balance sheet financial instruments, like loan commitment. The managing and monitoring process on credit risk is centralized at credit risk team management at credit risk department that prepare reports to Board of Directors and Head units on regular basis. Credit risk measurement Loans and facilities to banks and customers In measuring credit risk of loans and facilities to customers and to banks at a counterparty level, the bank reflects three components: The probability of default by the client or counterparty on its contractual obligations. (Current exposures to the counterparty and its likely future development, from which the bank derive the exposure at default. The likely recovery ratio on the defaulted obligations (the loss given default ). These credit risk measurements, which reflect expected loss (the expected loss model ) and are required by the Basel Committee on Banking Regulations and the Supervisory Practices (the Basel Committee), are embedded in the bank s daily operational management. The operational measurements can be contrasted with impairment allowances required under IAS 26, which are based on losses that have been incurred at the balance sheet date (the incurred loss model ) rather than expected losses (note 3/A). The bank assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. They have been developed internally and combine statistical analysis with credit officer judgment and are validated, where appropriate, by comparison with externally available data. Clients of the bank are segmented into four rating classes. The bank s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class. This means that, in principle, exposures migrate between classes as the assessment of their probability of default changes. The rating tools are kept under review and upgraded as necessary. The bank regularly validates the performance of the rating and their predictive power with regard to default events. Bank s internal ratings scale Bank s rating Description of the grade 1 Performing loans 2 Regular watching 3 Watch list 4 Non-performing loans The amount of default represent the outstanding balances at the time when a late settlement occurred for example the loans expected amount of default represent its book value. For commitments, the default amount represents all actual withdrawals in addition to any withdrawals occurred till the date of the late payment if any. Loss given default or loss severity represents the bank expectation of the extent of loss on a claim should default occur. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigation. Debt instruments, treasury bills and other bills For debt securities and other bills, external rating such as Standard and Poor s rating or their equivalents are used by bank treasury for managing of the credit risk exposures. The investments in those securities and bills are viewed as a way to gain a better credit quality mapping and maintain a readily available source to meet the funding requirement at the same time. A-1 Limiting and preventing risks policies The bank manages limits and controls concentrations of credit risk wherever they are identified in particular, to individual counterparties and banks, and to industries and countries. 15
The bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by borrower /group, product, industry sector and by country are approved quarterly by the Board of Directors. The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering onand off balance sheet exposures, and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. The following are other controls used by the bank to limit the credit risk: Collaterals The bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is common practice. The bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and facilities are: Mortgages over residential properties. Mortgage business assets as machines and goods. Mortgage financial instruments such as debt securities and equities. Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured. In addition, in order to minimize the credit loss the bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Collateral held as security for financial assets other than loans and facilities is determined by the nature of the instrument. Debt securities, treasury and other governmental notes are generally unsecured, with the exception of asset-backed securities and similar instruments, which are secured by portfolios of financial instruments. Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit which are written undertakings by the bank on behalf of a customer authorizing a third party to draw drafts on the bank up to a stipulated amount under specific terms and conditions are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. A-2 Impairment and provisioning policies The internal rating systems described in note (A-1) focus more on credit-quality at the inception of lending and investment activities. Otherwise, impairment provisions recognized at the balance sheet date for financial reporting purposes are losses that have been incurred and based on objective evidence of impairment as will be mentioned below. Due to the different methodologies applied, the amounts of incurred credit losses charged to the financial statements are usually lower than the expected amount determined by the expected loss models used at 30 September 2018 for Central Bank of Egypt s regulations (note A-4). 16